“…When money flows into a currency, it strengthens, and when money flows out of a currency, it weakens.”
When we place a trade in the forex market, we are buying one currency and selling the other. This is why forex is traded in currency “pairs.” As a visual example, we can reference the image below.
If we buy a currency pair, like the EUR/USD, we are buying euros and selling dollars. We place this trade when we believe the EUR/USD exchange rate will rise and allow us to sell back our euros for a larger amount of dollars at some point in the future.
But in the forex market, we can trade the other direction as well. So we could sell the EUR/USD, effectively selling euros and buying dollars. With that trade, we would want the EUR/USD exchange rate to fall so we can buy back the euros for less dollars than we originally sold them for.
So not only do we have a goal of buying low and later selling high, we have the option to sell high first, and then buy low later. There are no restrictions on short selling and we do not need to own any euros prior to selling the EUR/USD. This is what people refer to as a “two-way market.”
There are many reasons that currency exchange rates fluctuate 24 hours a day. If you would like to begin learning the ins and outs of what drives this market, check out How Fundamentals Move Prices in the FX Market.
---Written by Rob Pasche
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